The 2017 federal "Tax Cuts and Jobs Act" placed a cap of $10,000 on the amount of state and local taxes paid that an individual can deduct on their federal taxes. This limitation did not apply to C corporations. Consequently, businesses organized as pass-through entities like S corporations and partnerships pay increased taxes on business profits compared to C corporations because pass-through entities pay taxes on business profits at the individual (partner or shareholder) level.
For income tax years commencing on or after January 1, 2022, the bill allows pass-through entities to elect to pay their state income tax at the entity level so that the pass-through entity can claim an unlimited deduction at the federal level of state and local taxes paid ; except that the election is only allowed in an income tax year where there is a limitation on the deductions allowed to individuals under section 164 of the internal revenue code .
While this reduces federal taxable income for the pass-through entity, it does not reduce Colorado taxable income because, under current law, the individual and the partnership are required to add back any state and local taxes deducted at the federal level.
(Note: Italicized words indicate new material added to the original summary; dashes through words indicate deletions from the original summary.)
(Note: This summary applies to the reengrossed version of this bill as introduced in the second house.)